Talking shop: The way forward on child care

Supply expansion and quality assurance are top priorities

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We are trying something new this week, in the spirit of another suggestion we received in response to our reader survey several weeks ago. Rather than a traditional post, we are sharing the transcript of a conversation we had about child care policy. What problems need to be solved in the child care market? How could past proposals be improved? What is most important to do if only limited investments are possible? Our conversation lasted about 45 minutes, and this transcript has been lightly edited for clarity.

Kevin Rinz: Given that the Democratic candidate is now Kamala Harris rather than Joe Biden, and she has been a longtime proponent of many of the child care and early education policies that the Biden administration initially pursued but had to abandon ultimately along the way to the Inflation Reduction Act, it seems like those policies could return as a priority in a possible Harris administration. And it would be great if we could take some lessons from the first experience about how we might do better if and when we try again to pursue these policies.

Just to ground us in what the core economic problem here is, I think a lot of people think of the lack of available affordable childcare as a byproduct of market failure. The simplest market failure story I think I've heard people talk about with respect to problems in early care and education is that the returns to this kind of care are slow-developing, but long-lived. The cost of the care is high and incurred at a point in the life cycle where those purchasing the care have relatively limited resources. And you generally can’t borrow for this purpose, which is a financial friction that makes it difficult to purchase the needed or desired care in a way that works for families. That's a very sterile description of what the problem is. And I think it points most immediately to a solution along the lines of “student loans, but for preschool.” And I don't think that's how people usually think about what they want to do here. Do you have any other ways of thinking about this problem that align more closely with the solutions that people actually like to discuss here?

Chloe Gibbs: I think there is a struggle in this market about understanding what demand actually is and where the unmet demand is. That presents difficulties for childcare supply, which is a mix of public providers or publicly supported providers, private providers, and care happens in homes or in centers or in schools. And so there's this varied landscape of providers and they operate on a business model generally with very low profit margins. Knowing where the demand is, when the demand will occur, and for what ages of children is actually very critical for the providers of childcare.

To be able to provide what is a very labor-intensive product, you have to have the caregivers, the early childhood teachers, and there are regulations around how many adults per child, especially for very young children. That's not going to change. And so childcare providers need to know that they're going to fill the slots that they are providing. One way to ensure slots are filled is to operate off of a wait list in which you know you will always have somebody who is interested in that slot. That doesn't work out well for families on the consumer side, who need childcare at a particular point in time and are sitting on a waitlist. On the provider side, there are these dynamics wherein it is advantageous to have excess demand that they can't accommodate so that over time, as children age out, as families move, when you have disruptions, you can still fill the seats and still essentially make ends meet as a provider. I think that's an important part of the conversation.

I'll just reiterate that the varied landscape here—of types of providers and settings in which care is provided and funding streams—complicates the policy responses. Because when you intervene on one front, it has implications for the landscape as a whole.

Aaron Sojourner: The big picture is there's an investment shortage in young kids. From a social and economic perspective, there are key  barriers to investing as much in young children having high-quality care experiences as would be socially optimal. There are a bunch of forces pushing against that. One of them is that, from parents' perspective, many want to invest more but they don’t have access to private resources to do so and are credit constrained.

Currently, we demand the most of families when they have the least. When your kids are young, you're young. Parents had less time to save when kids are younger compared to when they are older, at K-12 or college ages. Parents have less current earning power than they will when kids are older. They have less experience in the labor market, maybe less education. So parents’ current earning power is lower. Parents do have more future earning power when kids are young, but have lower credit scores. Even though parents have more future income, they have less access to future income. So parents have less past, present, and future income when their kids are youngest. That's all the kinds of private income. There's no other secret source of private income besides past, present, and future income. 

Instead of compensating for this, public policy exacerbates the problem and puts less public resources into kids' care and education when kids are younger than when kids are older. Per year per child, we invest only about a ninth as much when kids are under age five as when kids are K-12 age. Once kids hit age five, we multiply our investment times nine. But in those early years, the public is largely on the sidelines and not helping families. High-quality care experiences are an investment with upfront costs and long-run benefits.

This investment shortage from the private side and from the public side is the fundamental problem that shows up as pain for many different people in many different ways. It shows up as pain for families in being stuck on a waiting list, in being dissatisfied with the available options, in being unable to afford care that is available. It shows up as pain for the providers in their economic instability. And it shows up as pain for the child care workers as low compensation.

As a matter of policy, we could subsidize parents’ savings for kids’ care, their borrowing, or we  can directly subsidize the investments. We do all those things for college through 529s, subsidized student loans, and public colleges and universities and tax-free endowments. Mostly we just do direct investment in K-12. We don't require families to borrow or save for that. We just directly invest in kids' care and education once they hit five and seek to ensure they have free access to high quality care and education experiences for 13 years. But, we don't really do any of that at any substantial scale in the first five years of a kid’s life, which are the ages at which inequalities in kids’ capacities really grow between kids from different kinds of families. That's one big failure. And that is the failure that's tied to parent's credit constraints. A related market failure is to notice that there’s no market on which a child can bid to choose their parents.

There's a second market failure, which is that early care experiences spill over onto each child’s future communities, but there’s no market that allows those future neighbors to arrange investments in their care today. The quality of young children’s care experiences has lifelong impact. Future neighbors and coworkers will be impacted by kids’ care experiences today. Those people would have an incentive to invest in those kids now and make sure they are set on a successful life trajectory. But they don't have any way to put in resources when the kids are young. There's a market failure.

The first market failure, the parent credit constraints, that's just a question of what would parents decide if they had access to their lifetime of resources. This is a second problem on top of that. This is beyond what parents would choose to invest in their own kids. This is recognizing that community members would be willing to invest more if there were a way to arrange for those benefits to be aligned with the cost, over time and across people. But It's impossible to do that through markets. The way we do that is through public policy through investing in care and education. That's what we do with K-12 but don't do in any substantial way with early childhood. We have a few small programs like Head Start and school-based pre-K, but again, we spend about nine times more per child per year in K-12 than in early childhood.

CG: I would just add to that the kind of early childhood experiences that Aaron is describing that generate those kinds of social benefits are high-quality. And that kind of high-quality care is expensive to provide. It's labor-intensive and it's expensive. And so that then contributes to the persistent gap between what families are able to afford at that point in their career trajectories and lifecycle, and what the cost of providing the kind of high-quality care that generates those long-term social benefits actually is.

AS: Yeah, absolutely. The other market failure that I was gonna mention is what Chloe was just bringing up, too, relates to the difficulty of judging care quality. The quality of non-parental care is difficult for parents and policymakers to assess. By definition, parents aren't there when the care is being supplied. Kids are too young to monitor, assess, or report the quality of the care. Care happens in diffuse settings throughout the community and so is difficult and expensive to measure quality at each place. Without information about quality, it's hard to marshal resources to support higher quality care. Young families struggle to finance care costs privately. They're attracted to what's affordable, which creates a race to the bottom, or a lot of pressure to accept lower quality or ambiguous quality. This makes care quality assurance a really important piece of policy and practice.

KR: When you bring all this into trying to design policy, it seems then that we've got a problem of insufficient quantity and also a problem of insufficient quality. And there's a trade-off between improvement on those two margins, especially when there is not an infinite amount of money available to address them. Are there things that we have reason to think are good ways of dealing with this trade-off, like identifying what we think is sufficient quality, avoiding escalating costs arising from the fact that there's not a lot of space for productivity gains in the traditional sense here. You can't just use fewer people or smaller spaces. Are there things that states that have adopted their own programs have found success with or ideas that it would be important to think about working into future iterations of this policy?

CG: I have a two-pronged approach to thinking about that. The first is that, yes, certainly there are these quantity-quality trade-offs that are important to consider. Should we serve more kids in particular types of settings, or should we direct resources toward improving the quality of care that children are experiencing? And I think that there is low-hanging policy fruit here.

For families that are very low income, there are some subsidized (free, public) options for them. When you look at care use across the income distribution, there is a hole just above families eligible for those subsidized options, where families do not qualify for targeted options and do not have enough resources to access a private market. They don't necessarily qualify for programs like Head Start and other free preschool programs that might be available at the state level.

If you focused policy efforts on that part of the income distribution and thought about subsidizing care for those families, which essentially just means expanding eligibility for existing options up the income distribution, I think there, you would actually get a lot of bite in terms of moving kids from informal care settings, from relative care into formal care settings where we believe, by most measures, quality is better. Then you're serving more kids, but you're also improving the quality of the experiences that they're having because you're shifting them from lower quality care or informal settings into formal settings.

So that's one place I think that policy can get traction on this issue. And the other is that I think the patchwork of providers complicates how we structure policy. Where are there gaps in the existing landscape and we could fill in and get the most improvement in the quality of kids’ experiences relative to what they're currently doing? Where are those pockets? There are public pre-K programs in lots of states. Some of them are more robust than others. And there is the Head Start program. And then there are child care subsidies. Can we identify who's falling through the cracks and not getting any of those programs or does not have access to an affordable, high-quality care setting?

To the extent that we can direct quantity expansions to the families and children for whom the change in what they are currently experiencing relative to what they would experience in the new offering would be really beneficial, those places where the gap in inputs is the greatest, then we expect the return on those investments to also be the greatest. That's the way I think about it. I'm interested to hear what Aaron has to say.

AS: The key thing to appreciate about quality of care is that, when you subsidize care, you must consider the difference between the quality of the care that you're crowding in relative to the quality of care that you're crowding out. Because young kids need care all the time. If you subsidize high-quality care, it'll make that more attractive to parents because it's cheaper, right? They will, on the margins, move their kids there. That's going to provide a more enriching, developmentally propulsive experience for the kids than whatever experience it's crowding out of those kids' lives.

On the other hand, if we subsidize low-quality care, we make that more attractive to parents because now it's lower cost and they're struggling under this dual responsibility of care and earning. We made it easier to meet that dual burden, but only by using low-quality care. So we crowd in lower-quality care experiences. We pay public money to hurt kids developmentally when we subsidize low-quality care.  We see mixed evidence in the research, some programs and policies seem to generate benefits and others sometimes generate harms. We should take that seriously. Subsidies for low-quality care benefit parents, they benefit family finances, but they can harm kids developmentally. With that, we're not fixing the market failure and getting positive spillover benefits to the community in the future. We're getting the opposite.

The solution is expanding access to high-quality care. That's the challenge. There's no way to do that without more resources. More resources is not failure. Success requires more resources. It's better to do it more efficiently than less, to not have costs go up more than necessary. But improving the quality of care and making it accessible to more families requires attracting more workers to the sector, which requires improving care job quality. To do that, we have to raise wages and compensation. We can also reduce child-to-staff ratios so that jobs are better for the workers, they're caring for fewer kids at a time.

Maybe it doesn't look good on the fiscal balance sheet, policymakers don't like the price tag, but the economic benefit-cost ratio can be very big even with a hefty fiscal price tag. There’s some evidence supply is pretty elastic and costs may not have to rise much. But we shouldn't pretend that there's a way to substantially expand access cheaply and well. Costs of production have to go up somewhat. We don't want them to go up more than necessary but they necessarily will go up somewhat.

KR: I think that's an important thing to call out. The spirit of the proposals that went into the American Family Plan and Build Back Better was very much in line with this idea of subsidizing high-quality care. The idea was that there would be a standard set for what would constitute high-quality care. Families purchasing that kind of care would have their own costs limited to some share of income that depended on their income. The providers would, on the back end, receive compensation that covered their cost of provision.

My question then is about the efficiency of spending much more money on this, because the overall cost does, at some point, become a political liability. In that kind of scheme, where families are insulated from the cost of provision, but providers’ costs are covered by the government, it seems to me like you could end up with like a segmented market in which a bunch of providers satisfy the criteria for providing high-quality care, serve most people, and their costs of providing that care cluster right around the maximum amount the government will pay them for it. Then some higher-income families will choose to purchase especially high-quality care from other providers, and low-income families may still find themselves facing this shortage of supply and be forced to use the same kind of smattering of, family care, informal care, other sources when they don't happen to find a provider in this subsidized bucket.

AS: Why do you think they would?

CG: Capacity constraints, essentially, in the subsidized care.

KR: Right. If one of the problems we currently face is insufficient supply, and we want to increase supply conditional on sufficiently high quality, that doesn't seem like something that will be easy to do. And maybe on some transition path, it seems there could still be shortages.

So I guess I'm curious then about whether you've encountered any other structures of subsidies that could avoid this leveling up of providers’ costs or avoid to some extent providing more subsidy than necessary. And then if you end up in a scenario where there are still shortages of subsidized care, I suspect that the people left out will be disadvantaged in other ways as well. I'm curious if you share that suspicion or if you have any thoughts on ways to avoid having that be an outcome of a transition to this higher-cost, higher-quality, higher-availability system.

AS: I would love to have the problems of a high-quality, high-access, high-cost system. Movement in that direction is progress. It's not going to be perfect. Anytime you're trying to make rapid change in how people are spending their time or how resources are used, there will be frictions.

To answer your point more directly, we could use different structures for subsidies. The Build Back Better plan was that the family pays the first dollar and the government pays the last dollar. Instead of putting a cap on the family payment as a percent of income, we could flip it around and say, for a family of this income, we will provide a scholarship or a voucher up to some amount. The government pays the first dollar and the family pays the last dollar instead of the other way around. That would keep some market pressure on price growth.

Another approach would just be more public production. That's how we do K-12 education. We want care and education provided for people who live in this community and we want to make sure it's high quality and it's produced efficiently. The most common system we rely on is public school districts. We also have private schools, vouchers, cross-district transfers, and charter schools to provide more choice and competition within that basic structure. More public production could play a role in early childhood care and education.

We could tie subsidies to a notion of care quality rooted in care worker job quality. Instead of trying to articulate care quality by regulatory micro-management and a classroom observation once every two years for an hour, we could define quality by the job quality of care workers, by compensation levels, low turnover, and high ratios of staff to children. High quality care requires an attentive and responsive, trusted adult. You can’t have attentiveness and responsiveness if the staff to child ratio is too low. You can’t have trust if turnover is too high. A speculative direction for policy is to pay for retention and pay for low ratios. Those are relatively easy to observe and regulate. Then get rid of other less productive regulations and constraints. Care worker pay increases do seem to increase care quality.

If we do use the Build Back Better family expenditure cap at 7% of income model, I share the concern that provider costs could get quite high. If the whole sector moves that way, then market prices start to lose bite, kind of like in healthcare or nursing homes. 

We can use competitions between providers for contracts to discover local costs of production and minimize costs of care, without compromising quality and without allocating access to care so unequally between children whose parents have different earning power. Policymakers would like to know what the local cost of production for high-quality care is in a given community. To learn that, we could run well-articulated competitions between providers for contracts to provide high-quality care. The contract would say, this is what high-quality care looks like, here's the service bundle, here are the markers of quality and the curricula, what are your bids to provide this service? We define quality and say we’re going to invest public resources to provide care for 100 children in this local market over the next five years. Who wants the contract to provide that? If you want to bid on the contract, show us your books, tell us what your budget is. The public can learn the cost of production for the kind of care we want through competition, but not through providers competing to attract individual families, but through providers competing for public contracts.

This gets to some of the business uncertainty problems that Chloe was talking about earlier. You create predictability for the providers and you say, we're going to support a provider to provide X number of slots over the next five years in this community. It's how Head Start works, that's how they decide what organizations provide Head Start services. Also, many states are using contracted slots in the biggest child care subsidy program, the Child Care and Development Fund (CCDF). But we can use that information about the local cost of production to set scholarship or voucher subsidy levels that families can use with other providers in the community and to keep those costs under control.

CG: I largely echo many of Aaron's points. I think this point you raised, Kevin, about the transition path is really pretty critical. What we currently have is that the public investment from the federal government in the form of child care subsidies through the CCDBG program is just not large enough to actually make any impact on quality of care writ large. And then the other version of a policy that has been most recently discussed was very comprehensive and at the other end of the spectrum, such that the dynamics to scaling up induce some of these concerns about crowding initially, and in particular do you crowd out the lowest income families among those who might be seeking care? I think that it is really important to be attentive to that.

I'll just add a couple things. One is, I think Aaron mentioned this, but public production could be targeted to communities where there is unmet need or to particular children from families who do not otherwise have access, much in the same way that Head Start does, but perhaps on a larger scale or through expansions to public preschool programs.

I also think the supply side investments are really critical. You could imagine doing the supply side investments apart from a family subsidy scheme. The reason I mention that is because we know that both presidential tickets seem to be amenable to expanding the child tax credit. What that means, even in the absence of anything specifically with childcare subsidies, is that families could have more resources. And we know from, for example, the Household Pulse Survey, when the expanded child tax credit was in place that families, especially those with young children, spent a portion of that extra money on child care.

So apart from what policy proposals look like on the child care subsidy side or on subsidizing demand, the supply side investments could be separable. And some of the approaches that Aaron mentioned about investing in the workforce, supporting child care businesses through some of the uncertainty and volatility that they usually face, and addressing the high cost of providing high-quality care could be done separately through supply-side investments. Those efforts could be targeted at particular communities and at centers serving kids from low-income families — using those independently to achieve some of the goals that we're talking about.

AS: Yeah, and let me second that. The idea of focusing capacity building, either through public production or through contract stability, and prioritizing communities where families have less private resources makes a lot of sense. A lot of research shows these families are struggling the most to provide high-quality care experiences. Making it more accessible to them, the research shows, has bigger, more positive impacts in those communities on average. Chloe mentioned earlier making sure people don't fall through the cracks. Head Start only has enough funding to serve about a quarter of families and kids that are eligible and only very disadvantaged children are eligible. The biggest federal child care program, the CCDF program, also has funding to serve about one in six kids who are eligible under federal rules. Not to mention more middle class families. These aren't small cracks that a few families are slipping through. There are gaping holes swallowing up lots of kids and families.

CG: To this point precisely, we actually don't have very good data about what the unmet need is. We know from lots of evidence that when you expand public programs or you provide subsidies, families move into care that weren't previously using formal care, but we don't really have a sense of where this unmet need is, and there just isn't great data that would help us get at that. We have suggestive evidence when you look at the stark income gradient in formal childcare use which suggests that families are constrained. We often know in survey data that families report struggling to find childcare that meets their needs and that that also has a pretty stark income gradient. But in some ways, this proposal I have about finding where those cracks are and what families are falling through them is actually easier said than done, I guess, given the data constraints.

KR: We've only got a couple of minutes left, so the last thing I'll ask is, given the urgency of the problem, is what if only something more modest were feasible, or something less ambitious than Build Back Better could happen? We've touched on a lot of different policy levers here. Maybe each of you could name two or three of the things we've covered that would be, in your view, critical to a pared-down approach to improving access to child care.

AS: I would prioritize kids whose families are struggling the most. That's where the evidence shows the biggest impacts on kids' life trajectories. Expand access to high quality care for the kids and families in communities that have the least resources first.

Expand funding at the youngest ages. We have a lot more focus on pre-K, ages three and four, because it's cheaper to produce, you can have more kids with each adult. But the first three years are also important, so expanding resources for disadvantaged kids at younger ages is also important.

In terms of bringing down costs, we need more innovation in measuring and subsidizing care quality. The U.S. Department of Health and Human Services’s Office of Policy Research and Evaluation and the U.S. Department of Education’s Institute for Education Sciences could run more grant competitions for research and small business innovation focused on ways to measure, deploy, and assure quality. How do targets defined around job-quality standards for child-staff ratios, compensation, and retention do at assuring care quality? Can technological innovation help bring down the cost and raise the reliability of measuring care quality at scale? Do these accomplish care quality assurance better than some existing regulations? The Department of Commerce could focus its research funding and programs on expanding child care supply through nurturing and growing small businesses that provide care. 

CG: I am going to echo those points, but I'm going to reverse the order. The first order of business in my view is workforce investments. I would love to see a focus on innovation in terms of pay and bonuses and that sort of thing, especially in the context of pretty tight labor markets, where I think it has been very hard for childcare providers to hire and retain people. And that's also an area in which we have evidence that doing so, paying people more, giving them retention bonuses, does keep them in the job. And to Aaron's point, we know that having a stable caregiver in those jobs that can build those relationships with children is really good. Turnover is really bad. So I would say, let's invest there. There are already a lot of kids in early care and education settings right now, so to the extent we can invest in that workforce and improve the quality of what kids are experiencing, I think we would get a lot of bang for the buck there. And I'll just point out that moms of young kids are in the workforce at historically high rates so that's a lot of children likely in non-parental care settings.

Then, I would add essentially along the same lines as what Aaron said, expansions to the kinds of settings that we know are high quality right now. And to the extent that we can do those expansions in targeted ways that move incrementally up the income distribution in terms of which families are served and brought into those slots, I think that's the way to go. There are lots of providers operating wait lists. Could we invest in high-quality places expanding their slots? That might be in Head Start centers that are particularly effective or in places where childcare subsidies are oversubscribed. Could we increase the rates of eligible families who are able to access those existing resources? So those would be my first orders of business in terms of what comes next on the policy front.

KR: Thank you both for doing this, this was great.